This month, a special working group is planning on bringing some law into the Wild West of physician practice management accounting.
Seven accountants--representing the Big Six firms and Chicago's Grant Thornton--and MedPartners Chief Financial Officer Harold make up a special panel selected by the Emerging Issues Task Force, a division of the Securities and Exchange Commission's Federal Accounting Standards Board. During the EITF's Sept. 18 meeting in the FASB's Norwalk, Conn., office, the working group is expected to suggest requiring PPMs that meet certain criteria to count every dollar their clinics receive as revenue.
That would help give a clearer financial picture of PPMs, which use dissimilar ways of counting revenue, a practice that often makes it impossible to compare companies. The working group's report also would affect the cost of acquiring physician practices by standardizing how PPMs account for such deals.
Eleven members of the 13-member EITF, made up of major accounting firms and associations of preparers of financial statements, must approve the working group's proposals before they're recognized as the industry standard.
"I think it's more analogous to standardizing a measurement for horsepower in engines," says Dan Ratner, CFO of Atlanta-based MD Alliance, a privately held multispecialty PPM.
"People are going to build engines and are going to have the horsepower that's there," Ratner says. "For marketing purposes, some people are conservative and some are aggressive."
Counting revenue would seem like a simple task, except that a PPM counting all physician group dollars as its own could possibly violate state corporate-practice-of-medicine laws. Because of this concern, companies such as PhyCor, American Oncology Resources and MD Alliance count as revenue only the management fees they receive from their practices.
Meanwhile, MedPartners, FPA Medical Management, Promedco Management Co. and PhyMatrix count every dollar their clinics collect as revenue, a practice accountants refer to as "grossing up." The companies say they can do this because they have financial control of the practices but that they don't violate corporate-practice-of-medicine laws because physicians retain clinical control.
Venture-stage companies usually follow this model to beef up their revenue totals in the face of high expenses for acquisitions, analysts say. Even MedPartners looks better under this model--instead of being a company that lost 15 cents per share during the first six months of 1997, it is a firm that brought in $3 billion of revenue.
"In the short run, companies are being valued on revenue when they're taken in the initial public offering market," says Andrew Demetriou, a partner at the Los Angeles office of law firm Jones, Day, Reavis & Pogue, who has been an independent adviser to the EITF's working group. "What slice of revenue they control will be a precursor to future earnings."
After consulting with two attorneys and the SEC, the working group, which formed in November 1996, is concluding that consolidation models violate no laws.
In fact, Ben Neuhausen of Arthur Andersen says, companies that don't consolidate their revenue may have to if they meet certain criteria laid out by the EITF working group regarding financial control of practices. He says he couldn't speculate on which companies would be affected if the full EITF approved his group's suggestions.
Under the consolidation model, PhyCor would have reported $1.5 billion instead of $518 million in revenue over the first six months of 1997. Either way, it's the second largest PPM in the nation, behind MedPartners. But under the consolidation model it's much farther ahead of No. 3 FPA, which booked $475 million in revenue for the same period.
The working group also is expected to provide EITF approval criteria for cases in which a PPM can use pooling-of-interest accounting, in which a company can combine its stock with another firm in a tax-free transaction. Again, concerns about violating corporate-practice-of-medicine laws are driving the discussion because in theory a stock combination would mean a PPM owns the practice.
A Salomon Brothers report says that the price paid for physician groups could decline by up to 10% if pooling-of-interest accounting is eliminated, possibly slowing down PPMs' acquisition pace and cutting into companies' earnings. Most PPMs, including MedPartners, use pooling-of-interest accounting. PhyCor does not.
Even though the working group is approving of MedPartners' accounting techniques, members say MedPartners CFO Knight's presence on their panel had no undue influence. The EITF is not required to have more than one industry representative in a working group. Other companies were represented by their accountants, says Price Waterhouse's Woody Grossman, a working group member.
Knight, who was in Ernst & Young's healthcare group for 13 years before becoming MedPartners' founding CFO in March 1993, says other working group members knew what his point of view would be.
But PhyCor CFO John Crawford says he "was surprised that Hal Knight was able to become a representative on that task force because the company he represents has a substantial vested interest in the outcome of the discussion."